Before understanding the supertrend indicator, understanding the ATR is necessary as super trend employs ATR values to calculate the indicator values. The supertrend indicator is plotted over the price chart of the stock or the index. The indicator line changes its color between green and red based on the price moment in the underlying. Super trend does not predict the direction, rather once the direction is established it will guide you to initiate a position and suggests you to stay in the position till the trend sustains.
What should you know?
- When plotted, the supertrend indicator appears like a alternating green and red continuous line
- A buy signal is generated when the stock/index price turns greater than the indicator value. At this stage, the indicator color turn green and you can also see a crossover of the price versus the indicator (price greater than indicator value)
- Once the long position has been established, the trader is advised to hold the position till the price closes below the green line. So in a sense the green line helps as a trailing stoploss for the long position
- A sell signal is generated when the stock/index price turns lesser than the indicator value. At this stage, the indicator color turn red and you can also see a crossover of the price versus the indicator (price lesser than indicator value)
- The sell signal can be used to initiate a fresh short or exit long. Although waiting for the sell signal to exit the existing long position can sometime lead to taking a loss. So the trader should use his discretion here
- Once the short position has been established, the trader is advised to hold the position till the price closes below the green line. So in a sense the red line helps as a trailing stoploss for the short position
- Supertrend is basically used to identify a trend therefore it works best in a trending market
- The supertrend indicator when compared to a regular Moving Average trading system generates fewer false signals, for this reason the super trend indicator is preferred over a Moving Average trading system
On Kite:When you select Supertrend indicator from the list of studies you will be prompted for two inputs – Period and Multiplier.
Period refers to the ATR number of days. The default value on Kite is 7, which means to say that the system will calculate the ATR value for the last 7 days. You can input any value you deem suitable.
The multiplier refers to a value by which the ATR will get multiplied. The default value on Kite is 3, so whatever is the value of ATR, it will get multiplied by 3. Multiplier is a crucial input for Super trend. If the multiplier value is too high, then lesser number of signals are generated. Likewise if the multiplier value is too small, then the frequency of signals increase, hence chances of generating false trading signals are quite high. I would suggest you keep this value between 3 and 4.
Once the indicator is plotted, this is how it appears on the chart –
Notice how the indicator changes the color as the price moves. Also, whenever the buy/sell signal is generated green and red arrows are generated (respectively) prompting the trader to go long or short on the stock.